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Nymex Power Futures Anything But Electric

Nymex Power Futures Anything But Electric

The chips are stale; the drinks are flat, and people are leaving. The New York Mercantile Exchange electricity futures contracts aren't very festive, and now the host is wondering what it can do to liven up the party.

Despite much fanfare over their respective launchings, the five electricity contracts have largely languished for lack of activity. "I think there is widespread interest in trading the contracts once they become liquid but very little interest in trading the contracts to help reach that critical mass of liquidity," said Tim Evans, senior energy analyst with Thomson Global Markets in New York City. John Saucer, an analyst with Salomon Smith Barney, said he doesn't follow the contracts simply because they aren't liquid, and he doesn't expect to be paying much attention to them anytime soon.

One thing Nymex could do to boost liquidity is eliminate all but one contract in the East and one contract in the West, suggested Randall Gibbs, owner of BTU Energy Futures. Cinergy should remain in the East, and California-Oregon Border (COB) should be the western contract, he said. Gibbs said his firm is leaving the Nymex electricity trading ring this month after failing to get the exchange to waive the cost of its $6,500 to $8,000 monthly lease. Gibbs said if he were Nymex, "I would pay locals to stay in the ring for six months to get that contract going. I would offer substantial subsidies to those companies."

Gibbs doesn't like talk he's heard of Nymex removing the contracts from the pit and trading them electronically. Others who have left the Nymex electricity ring are Paribas Futures Inc., Cogent, and ABN Amro Bank.

Robert Levin, Nymex senior vice president for planning and development, conceded the exchange is examining various proposals for bringing liquidity to the contracts, particularly with an eye to bringing in more market makers. "The contracts themselves are fine, and so it's a matter of, I think, supporting market-making and then getting back out to the customer base, the commercials, and reinforcing with them what we're doing and attract them back in. I think that's pretty much it."

Levin wouldn't comment on traders who have left the electricity pits or say what, if any, suggestions they have given the exchange for improving liquidity. While he conceded the contracts are anything but robust, Levin said that's not entirely the fault of Nymex. "We're still talking about an industry where the overwhelming lion's share is still tied up in longer-term deals as it is. Some of it is freed up, but most of the part that's freed up is focusing on the very, very near-term, which is traditionally not the realm of futures contracts."

Augmenting this scenario against liquidity is an industry that sees long-term electricity deals as largely high-risk plays. Energy industry executives on the conference circuit often warn the farther out you go with power deals, the farther you have to fall.

Levin blames faulty and slow progress of electricity deregulation for the dearth of activity in electricity futures. "Natural gas feeds electricity, and yet the natural gas commercial market is far larger [than electricity]. I think we're still in that holding pattern of when do the regulators allow [electricity] to be a real market.

There's no denying electricity futures suffer from comparision with natural gas. The volume record for the much longer running Nymex gas futures contract traded at Henry Hub is 203,807 set July 23, 1999, while the Palo Verde contract set the highest record of all five electric contracts Feb. 19, 1998 at 2,026. The California-Oregon Border (COB) contract record is 1,581, set Dec. 18, 1997. The Cinergy record stands at 1,086, set Oct. 23, 1998. Entergy and the Pennsylvania-New Jersey-Maryland (PJM) contracts have yet to break 1,000.

While Levin blames regulators, others point out Nymex has handled the electric market much differently than it did natural gas, jump-starting multiple contracts at locations with limited trading. For many years the only contract for gas was at Henry Hub, and that contract was only brought on line after Nymex had extensive discussions with industry leaders across the country and set up traveling educational forums. Part of the problem with electricity futures has been the regional nature of the industry and pressure from competing exchanges threatening to set up contracts.

The California Power Exchange last recently touted the matching of 250 contracts for electricity delivery in August and September, marking the first significant trading activity for the PX Block Forwards Market. To Levin, though, comparing California PX contracts to Nymex contracts is akin to comparing apples to oranges.

"We have continually been disappointed that California utilities have been held captive to any market, and we think the sooner they're allowed to participate in the free market, the better for California deregulation and the better for everybody."

Levin said the exchange has no plans to abandon any of its electricity futures contracts. Nymex, in fact, is looking to launch its sixth electricity futures contract, Mid-Columbia next year.

Randall said it's a point of pride for Nymex to hold on to the contracts and not de-list them. "They are the energy hub of the country in terms of trading any form of energy. They're not going to go down easy on these contracts. I think the contract right now is going to go to sleep for a protracted period of time. I don't know if there will be a Prince Charming coming along to kiss it and bring it back to life."

Joe Fisher, Houston

©Copyright 1999 Intelligence Press, Inc. All rights reserved. The preceding news report may not be republished or redistributed in whole or in part without prior written consent of Intelligence Press, Inc.

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